You have been offered a unique investment opportunity. If you invest $10,000 today, you will receive $500 one year from now, $1,500 two years from now, and $10,000 ten years from now.

a) What is the NPV of the opportunity if the interest rate is 12% per year? Should you take the opportunity?

b) What is the NPV of the opportunity if the interest rate is 8% per year? Should you take it now?

Instructions are listed below.

Explanation:

Giving the following information:

Io = - 10,000

Cf1 = 500

Cf2 = 1,500

Cf3 = 10,000

Based on this information and using the following formula, we need to calculate the net present value:

NPV = - Io + ∑[Cf / (1+i) ^n]

Cf = cash flow

A) i = 0.12

Cf1 = 500/1.12 = 446.43

Cf2 = 1,500/1.12^2 = 1,195.80

Cf3 = 10,000/1.12^3 = 7,117.80

Total = 8,760

NPV = - 10,000 + 8,760 = - 1,240

Under these circumstances, the investment shouldn't be done.

B) i = 0.08

Cf1 = 500/1.08 = 462.96

Cf2 = 1,500/1.08^2 = 1,286

Cf3 = 10,000/1.08^3 = 7,983.32

Total = 9,732.28

NPV = - 10,000 + 9,732.28 = 267.72

Under these circumstances, the investment shouldn't be done.